Transport Committee on Sept. 20th, 2016

[Sean Fraser, Liberal, Central Nova, NS]

Are you making any efforts to reach out to those who are eligible to use it who may not be using it to get their—at the very least—qualitative feedback on the impact it's had on their operations and their ability to move product?

[Fred Gaspar]

There has not necessarily been a formal effort, but there is ongoing and iterative dialogue with both the shipper community and the carrier communities, so we don't lack for informal feedback.

That's where I drew the comment I made earlier about the whole notion of what it's done to the negotiating climate between the shipper and the carrier.

[Sean Fraser, Liberal, Central Nova, NS]

I completely appreciate that when you break up a monopoly it can change the negotiating landscape.

On the rail side, is there any assessment of the actual cost to rail to maintain the 160-kilometre interswitching?

[Fred Gaspar]

They may characterize it as lost opportunity, by virtue of having to make their track available for another carrier's goods they're not able to set price, but we don't have any data in terms of what that would be. They might be tracking it that way.

[Sean Fraser, Liberal, Central Nova, NS]

Sure, I think it would be helpful to understand what the actual cost would be to the players before we make a change.

I will just change tack to the intermodal forms of transportation. You commented earlier about how there could be investment in getting things from the rail to ports, for example. Have you highlighted any priority areas that the Government of Canada could be investing in to more efficiently move these products?

[Fred Gaspar]

We haven't, no, because it's not really our role to do so. Again, anecdotally, I don't think I'm telling any tales out of school—you've probably heard it as well—but certainly where rail meets marine infrastructure in this country could obviously use more efficiency and more supply. But in terms of whether there is a critical point that I can look at and say that port at that facility needs to be fixed before next year, no, it's nothing like that.

[Sean Fraser, Liberal, Central Nova, NS]

Sure.

The focus on interswitching, specifically, seems very much to be a western Canadian grain farmer issue. Is this not a tool that could be useful elsewhere in the country where there might be a rail monopoly? I'm from Nova Scotia, and we have essentially one rail line from the tip of the province to the opposite tip. Is this not a tool in other situations where there is a monopoly that would also be useful to promote efficiency?

[Fred Gaspar]

Academically, the answer would probably be yes, logically, if it works in one place it should work in another place. But the circumstances are different, both in terms of the volume of product that is produced in western Canada—particularly grains—and the challenge in getting it to their markets. I don't know enough about the specifics of the Atlantic Canada market to dismiss what you're saying. It might be the case, but certainly we have not received any indication from Transport Canada or others that there's any desire to move in that direction.

[Randall Meades]

And part of the interswitching was to mitigate a supply problem that there was, to bring more supply, specifically targeted at grain. There's not a supply issue on the east coast or even in central Canada from what we can determine.

[Sean Fraser, Liberal, Central Nova, NS]

Thank you.

[The Vice-Chair, Conservative, Luc Berthold]

Thank you very much, Mr. Fraser.

Mrs. Block, you have the last five minutes.

[Kelly Block, Conservative, Carlton Trail—Eagle Creek, SK]

I want to talk a little bit about the interswitching rate that you referenced in your opening comments, and then again later in a couple of answers. And I want to talk specifically about the difference between the commercial rate set by the railways and the interswitching rate that's set by the agency. And of course we've heard a lot about the Parrish and Heimbecker dispute and the rate difference of $12 between the regulated rate and the commercial rate.

What is CTA's target relative to the commercial rate? And is $12 your target?

[Randall Meades]

We don't base the rate on commercial rates. First off, there is no one commercial rate, there are all kinds of contracts that go back and forth, and price is determined on a transaction-by-transaction basis. These are effectively shipping contracts between a shipper and a carrier, and they vary from commodity, from time...there are a number of aspects. In determining what the rate is, we take all of the costs into account of what it would take to move over a particular distance. So you have things like depreciation, cost of fuel, you have all the costs that a railway would undertake and, to be fair, we add in profit as well, because companies have to make a profit.

So there's a very complicated determination using a great number of variables, but we do it from the bottom up, and that's what we determine the rate on. And again, that rate is part of the interswitching regulations, which is something that we can review on an as-needed basis as well.

[Kelly Block, Conservative, Carlton Trail—Eagle Creek, SK]

What is the average difference between the commercial rate and the rate that you set? Have you had any conversations with the railways about the difference between the rates?

[Randall Meades]

It's very difficult for us to get information on rates, because, as I indicated, we're talking talking about commercial rates and that's proprietary information, that's tort law, that's a contract between parties, and we don't have access to private information like that. We do get some information, but that's on a proprietary basis, and we're unable to share it. For example, when we do a lot of our costing associated with railways we get proprietary information from the railways that we're unable to disclose. It's effectively not our data.

[Fred Gaspar]

The key point is that we don't set our rates as a function of the commercial rate, because there is no one commercial rate.

[Kelly Block, Conservative, Carlton Trail—Eagle Creek, SK]

So interswitching distances have been enacted since 1904. It started with four miles and now we have a number of different distances in the legislation. I'm going to go back to the 160 kilometres. What would be problematic about leaving the 160 distance in legislation in case six shippers needed to use it?

[Fred Gaspar]

I guess I could answer by saying it wouldn't be problematic. We're a regulator. We're here to serve the Government of Canada as per direction received. From our perspective, we would be prepared to support that mandate or any other if it were given to us.

[Kelly Block, Conservative, Carlton Trail—Eagle Creek, SK]

Thank you.

[The Vice-Chair, Conservative, Luc Berthold]

Thank you very much, Mr. Gaspar. Thank you very much, Mr. Meades. I would also like to thank your whole team who has been here assisting you in your presentation before the committee.

We will suspend our session for a minute to let the other witnesses take their seats.

Thank you.

[The Vice-Chair, Conservative, Luc Berthold]

Let us resume. I invite you to take your places, please.

The Standing Committee on Transport, Infrastructure and Communities will now continue its study of the various provisions of the Fair Rail for Grain Farmers Act.

Our next witnesses represent the Canadian Federation of Agriculture, Cereals Canada, and Grain Growers of Canada.

Our chair, Mrs. Sgro, has had conversations with each of these groups. Each group has seven minutes to make its presentation. Please try to respect that time limit so the MPs have the time to ask you questions after your presentation.

We will begin right away with the representative of the Canadian Federation of Agriculture.

Mr. Banack, are you ready?

Do you want to start now?

[Humphrey Banack, Vice-President, Canadian Federation of Agriculture]

Thank you very much for giving me the opportunity to come this morning to speak to the committee about Bill C-30. My name is Humphrey Banack. I'm vice-president of the Canadian Federation of Agriculture. I'm a grains and oilseeds farmer in central Alberta. Transportation is critical to our family operation there. We farm 7,000 acres of grains and oilseeds. Today it's very difficult for me to leave the farm. We're harvesting wheat. Yesterday afternoon I got the combines running and left them in my wife's and my brother's hands and away I went. So for me to leave the farm at this time of year is a challenge, but transportation is key to our moving forward.

As I said, our organization represents farmers right across Canada, and I think it's very important to have the farmer's view here today. Bill C-30 has several key objectives. This act amends the Canada Grain Act to permit the regulation of the contracts relating to the arbitration of grain disputes, respecting the provision of those contracts. It also requires CN and CP to move minimum amounts of grain specified under the Canada Transportation Act by the order of the Governor in Council.

I hope by the time I'm finished here today you will recognize the importance to farmers of achieving these objectives of transportation of our product and fully appreciate that when we talk of shippers we're talking of grain companies. But it's ultimately farmers who will pay these bills. All of these objectives are covered and closely related to the Emerson report, which is soon going to be coming before the House and to the minister's table.

Before I go into specific reasons why Bill C-30 needs to be maintained, let me briefly explain our position in the industry. Farmers in western Canada sell or export 70% of the wheat we produce, 50% of the canola, and 25% of the coarse grains because of a small Canadian marketplace for our product. Western Canadian grain on average has to be transported 1,500 kilometres while most of our major competing countries around the world have a much shorter haul in the range of 300 to 400 kilometres. At least 94% of those exports are moved by rail to Canadian port positions and to final destinations in the U.S. and Mexico, unlike our competing farmers in the U.S. who in contrast use trucks and barges to transport 50% of the grain they export. This provides viable transportation competition to railways. Canadian farmers have no other viable transportation opportunities.

Consequently, between 35 million and 40 million metric tonnes of western Canadian grain is captive to rail monopoly annually. In the 2014-15 year, Canadian farmers paid $1.4 billion in freight charges to export their grain. This was not paid by the shippers. The shippers are sent the bill but the freight is paid by farmers who have no way to recoup these charges outside of markets. In this equation, grain companies are little more than service providers with farmers paying the entire bill. Farmers pay for the lack of grain movement. They pay all the freight for moving the grain. They pay for disruptions. They pay for delays. They even pay the penalties charged by shipping companies when their vessels have to wait in port, for demurrage.

This is acknowledged in the Emerson report that says that if service is unreliable or unpredictable contract penalties, lost sales, and lost premiums ensue. Shippers bear these costs, which are significant, and pass them back to farmers. Our livelihood and even our monthly cash flow depends on the timely, dedicated, and concentrated efforts of the two railway companies that basically have a monopoly. Farmers' ability to manage their grain movement—and by extension their cash flow and their ability to pay their bills on time—is captive to a transportation system that is a monopoly focused solely on cutting costs and maximizing returns.

On managing the volume of grain moved by the railways, the minister must maintain the legislative authority to mandate the volumes of grain needed to be moved at any given time. The success of the Canadian grains and oilseeds industry is contingent on finding international markets, providing a competitive price for those markets and getting the product to the market in a timely fashion. All those conditions cannot be left to the vagaries of the railways that are focused on high return commodities and cutting costs and increasing returns. Because farmers have no alternatives for access to export markets and because farmers need competitive freight rates, volumes of grain need to be moved in a timely manner, especially during times of bumper crop conditions and high demand in the international markets.

In my opening remarks I said we are in the midst of harvesting our wheat crop today. It is the largest wheat crop I've ever grown on our farm, and across western Canada we're hearing huge numbers.

We're going to have another very big crop in western Canada, very similar to the one in 2013. The government needs to maintain the authority to regulate volumes through an order in council by a request to the transport minister to ensure the railway system does not neglect the grain industry. We cannot afford to let down our international markets. When well-established markets to customers are lost because product is delivered late or not at all, it is very difficult to get those markets back. Financial success and even the survival of our farms is contingent on our being able to sell our grain to pay hundreds of thousands of dollars in production costs.

It is important to note that if volumes are regulated, it needs to be done in a way to prevent unintended negative consequences. In 2014, when the volumes were regulated, the railways, in order to increase the volumes to meet the demand, left areas with longer haul distances and logistic challenges plugged with grain. Northeastern Saskatchewan is one point to take in.

The regulated volumes imposed only applied to export grain. That is where the largest issue was and is. The railways moved the necessary infrastructure and met most of those targets.

The domestic markets, both for human consumption and for animal feed, were put in peril, as both were well below accepted input storage levels for an extended period of time. From reports received, a flour mill in eastern Canada was hours away from being unable to supply flour to Tim Hortons, and feed mills in the Lower Mainland of B.C. had feeding operations on restricted deliveries. While a shortage of our daily Tim Hortons' order may be devastating personally, a barn full of birds without feed would be an industry nightmare.

As we have learned from past experience, every action has a reaction. Steps should be taken to ensure that when grain movement volume is regulated, it is done in a balanced fashion, in order to ensure that problems solved in one area do not create problems in another.

Interswitching has been a huge topic around the table this morning. It gives shippers the opportunity to shop for lower freight rates and is extremely important, and expanded distance should be maintained. It is critical that railways work within the rules and the spirit of interswitching objectives. Interswitching is a simple mechanism facing competition in what is otherwise a monopoly. People even say that interswitching isn't working. We've seen some smaller numbers; Jean-Marc showed me some numbers, such as 4,500 cars moving here. It may not be a lot, but it's important to make sure it's always there. Pulse Canada has said that where expanded interswitching is available, the freight rate has been cut by about 20%.

Thank you very much for your time this morning. I'm getting a signal from the front, so we'll leave the last couple of pages to put in at the end.

Thank you. I hope my time off the combine is well spent.

[Voices]

Oh, oh!

[The Vice-Chair, Conservative, Luc Berthold]

Thank you, Mr. Banack. We appreciate your presence at the committee.

I will turn it over to Mr. Ruest now, who is from Cereals Canada.

[Jean-Marc Ruest, Vice-Chair of the Board of Directors, Cereals Canada]

Thank you, Mr. Chair and members of the committee.

My name is Jean-Marc Ruest and I am the vice-chair of the board of directors of Cereals Canada.

Cereals Canada is a value chain organization that includes representation from farmers, crop development and seed companies, and shippers, exporters, and processors. The brief that has been circulated to members includes additional background on the organization.

On behalf of Cereals Canada, I want to thank the standing committee for the invitation to appear before you today. Reform to legislation governing rail transportation for grain is critical if Canada is to meet growing demand and maintain a reputation as a reliable supplier. Failure to reform our regulatory framework will negatively impact the entire value chain, including farmers, grain handlers, and exporters.

In order to properly speak to the provisions of the Fair Rail for Grain Farmers Act, I would like to start by saying a few words about the review of the Canada Transportation Act itself. The review of the act was accelerated because of the 2013-14 grain transportation crisis. This crisis impacted the entire value chain, and damaged Canada's brand and reputation as a reliable supplier of agricultural products. The crisis cost farmers, grain-handling farms, exporters, Canadian value-added processors, and the Canadian economy as a whole. Canadian agriculture and the Canadian economy cannot afford for this to happen again in future.

The CTA review report, referred to as the Emerson report, did not fully address the fundamental problem of railway market power and the impact it has on the availability of rail service to meet the needs of Canadian grain shippers. The report is built on a basic assumption that there is a competitive transportation environment in Canada. This assumption does not apply to western Canadian grain sectors. Virtually all shippers are served by one carrier, and are subject to monopolistic pricing and service strategies. Therefore, the government has a critical role to play in establishing a regulatory structure that mimics a competitive environment.

Cereals Canada has recommendations for immediate action and long-term requirements that will help accomplish our common goals for a successful grain transportation system. Looking first at the provisions of the Fair Rail for Grain Farmers Act and specifically to extended interswitching provisions, the current extended interswitching distance of 160 kilometres should be extended indefinitely. This provision is proving to be an effective tool to provide additional competition between the two Canadian class I railways as well as with at least one other North American carrier. Its very existence provides eligible grain shippers an extremely useful competitive tool to access in negotiations with rail service providers. This competitive provision is of benefit, is being used, and it must be retained.

Turning now to the minimum volume requirements, the Fair Rail for Grain Farmers Act allows the government to set minimum required grain volumes that must be moved by the railways. Cereals Canada is recommending that these provisions of the act be retained beyond 2017. These provisions should be extended until legislation is enacted that will introduce true commercial accountability to all system participants. The 2016 crop will be of similar size to the crop of 2013 that preceded the transportation crisis. These levels are not an anomaly but the new normal.

Our production is diverse, and is destined to between 100 and 200 countries around the world. If we do not meet our contractual commitments in each of these markets, our reputation as a reliable supplier will suffer irreparable harm. Retention of the minimum volume provisions will allow for rapid and decisive response from Canada if past transportation failures begin to recur.

With respect to longer-term requirements, Cereals Canada believes the issue of commercial accountability must be addressed. A hallmark of modern commercial relationships is that parties are held accountable to each other for their respective performances. Grain shippers have long been bound to performance standards with financial penalty through tariffs unilaterally set by the railways. However, there is no mechanism for shippers to hold railways commercially accountable for their level of service to the shippers they serve.

In practice, because of the imbalance in negotiating power between railways and captive shippers, railway penalties for non-performance cannot be commercially negotiated. Railway accountability requires a legislative backstop. Without this, little can be done to systematically address service failures, and there's almost no way for shippers to hold the railways accountable for inadequate service. Accountability for service commitments is a prerequisite to preventing another grain transportation crisis.

Secondly, we also need to better define what constitutes adequate and suitable rail service under the transportation act. The railway service obligations are set out in the Canada Transportation Act as “adequate and suitable accommodation” of traffic. This term is not well defined and has been the point of dispute between railways and shippers for many years.

The CTA review report or Emerson report recommends changes to the definition that we believe would dilute the current definition of obligation and negatively affect grain sector shippers and those in other sectors from accessing the competitive provisions within the Canada Transportation Act. Instead, Cereals Canada recommends enshrining in law the principle that rail service provision be demand-driven as opposed to supply-driven. The nation's economy cannot be expected to fully capitalize on global marketing opportunities when the ability to provide the goods to international customers is governed by one's domestic rail service provider.

Thirdly, we must review the powers of the Canadian Transportation Agency. The Emerson report recommends that the CTA be given the authority to act on its own motion to investigate railway service issues and that it be given the power to issue ex parte orders in situations requiring urgent attention. This power would relieve shippers of carrying the sole burden for challenging railways in circumstances in which service is inadequate, by empowering the agency to investigate systemic issues and to take action where necessary. This is one recommendation from the Emerson report that is supported by Cereals Canada.